1. Compute gross margin , contributory income and operating income for both rest
ID: 2568216 • Letter: 1
Question
1. Compute gross margin , contributory income and operating income for both restaurants.
2. Calculate a common-size vertical income statement for each restaurant.
$38,700
$18,800
Comment on the performance of each restaurant. Would you invest in A or B?
$38,700
$18,800
Comment on the performance of each restaurant. Would you invest in A or B?
Explanation / Answer
Common-size Vertical Income Statement for Two Restaurants –A and B:
Calculation of common-size income statement for each restaurant:
Restaurant A
%
Restaurant B
%
Sales
250000%
100
$205,000
100
Cost of Sales
$140,000
56%
$78,000
38.05%
Gross Margin
$110,000
44%
$127,000
61.95%
Wage Expense
$35,500
14.20%
$71,000
34.63%
Supplies Expense
$15,000
6%
$17,000
8.30%
Other Direct Costs
$6,500
2.60%
$6,100
3%
Contributory Income
$53,000
21.20%
$32,900
16.05%
Rent Expense
$7,500
3%
$8,500
4.15%
Insurance Expense
$2,500
1%
$2,000
0.98%
Other Indirect Expense
$4,300
1.72%
$3,600
1.76%
Operating Income
$38,700
15.48%
$18,800
9.17%
Comment on the performance of each restaurant –
Restaurant A
The cost of sales of restaurant A is high, which caused a reduction in gross margin. Among all other direct and indirect expenses, wage expense is relatively high. Hence, the direct costs accounted for almost 50% of gross margin thereby reducing contributory margin to 21.2%
The operating expenses such as rent, insurance and other indirect expenses are marginal resulting in a net profit of 15.48%. Considering the vertical analysis percentages, the performance of Restaurant A is good except for the considerable portion of cost of sales and wage expense.
Restaurant B
The cost of sales of restaurant B is less, resulting in a good gross margin. However, the high wage expense accounted for almost 56% of gross margin, which made the restaurant post a relatively less contributory margin.
The operating expenses including, rent, insurance and other indirect expenses are marginal resulting in a net profit of 9.17%. Considering the vertical analysis percentages, the Restaurant B incurred huge wage expense which impacted its overall profit.
Comparison of the performance of two restaurants:
Comparatively, the overall performance of Restaurant A is better than Restaurant B. Though Restaurant B recorded higher gross margin (61.95%) than Restaurant A (44%), the huge wage expense of restaurant B impacted its contributory margin. Hence, the contributory margin and the operating income of restaurant A are better than restaurant B.
The operating expenses including the indirect expenses of both the restaurants are marginal, with A recording lesser percentages than B.
From the given data, Restaurant B seems to have lesser control on its wage expense, which is more than 50% of Restaurant A. Also, the net operating profit of A is much higher than that of B.
Hence, from the given data and percentages, Restaurant A seems to have better control on its expenses and records a satisfactory net operating income.
The recommendation for investment is Restaurant A.
Calculation of common-size income statement for each restaurant:
Restaurant A
%
Restaurant B
%
Sales
250000%
100
$205,000
100
Cost of Sales
$140,000
56%
$78,000
38.05%
Gross Margin
$110,000
44%
$127,000
61.95%
Wage Expense
$35,500
14.20%
$71,000
34.63%
Supplies Expense
$15,000
6%
$17,000
8.30%
Other Direct Costs
$6,500
2.60%
$6,100
3%
Contributory Income
$53,000
21.20%
$32,900
16.05%
Rent Expense
$7,500
3%
$8,500
4.15%
Insurance Expense
$2,500
1%
$2,000
0.98%
Other Indirect Expense
$4,300
1.72%
$3,600
1.76%
Operating Income
$38,700
15.48%
$18,800
9.17%
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